The Art and Science of Game-Changing Innovation

Summary from the Front End of Innovation Confernce in Boston, May 2008. 

When he took the position of CEO of P&G, A.G. Lafley understood purpose and values of company. His experience and instincts put the customer at the center of the innovation strategy. The company believed innovation was the core issue. The challenges to be overcome were:
1.    They defined innovation too narrowly in terms of technology and chemistry
2.    They innovation success rate was only about 15%
3.    They were not facing the realities of a disruptive marketplace

The successs should be manageable and better than the 80-85% failure rate for new products. Innovation is the transformation of product to commercial success. It doesn’t count until the customer parts with the money. Through improvements in the process, successes increased to 45%.  Not all units follow the stage gate process effectively. The front end is the fuzziest, the least defined, and the most important part to achieve disruptive innovations. He advocates getting prototypes in front of the customer as fast as possible.

Too much process kills creativity. Great inventors have individual processes, connecting things that most others don’t see. There are different ways to get there. They are naturally curious. They see more possible connections. Their minds generate more ideas.  

But, ideas are of no value until you get a prototype in front of the customer. It’s the most Important part of process. “Prototype fast and fail early.” The challenge is not ideas, but the clarification, sorting, development and qualification.

Identifying the benchmarks that help evaluate real breakthrough products is the most difficult piece. The primary goal of the innovation portfolio is to extend product lines and categories with meaningful improvements. P&G targets 10-30% to come from real disruptive products. Transaction learning is really important to understand who the real prospect for the product will be. Will they purchase? What will the usage cycle look like? It’s a simple business model. Achieve higher trial rates and you get higher loyalty rates. To understand who will purchase at what rate and price, under what circumstances is transactional learning. It’s tough to do it efficiently. But efficiency produces more at bats and that increases the number of hits.

In the late 90s, the company spent too much time looking at reports, memos, computer screens and each other, leaving their back sides facing the customer. To correct that, they tried to get out to the customer. The “Living it” program put them in the customer experience, going to small stores, working in stores and getting in direct contact with customers. They started bringing consumers into live labs, even building nurseries into the research center.

Traditional research showed people liked the Tide package. No one complained about it. Lafley’s own face-to-face contact revealed facts like “no one opens Tide with their hands. It breaks your fingernails.” Instead, users resorted to screwdrivers, nail clippers, etc. You have to see and experience what the consumer does because they can’t always articulate what they really want. And, they can’t ask for what they can’t imagine. That’s a benefit of including the consumer in the design process.

Structures can frustrate teams. No single structure works. An amoeba continuously changes shape to survive. Organizations should also. Some businesses have well defined new development groups. Some form around domains or platforms. P&G is always looking for totally new ideas that can grow to $75-100 million/year products. A concept called Clay Street, borrowed from toy industry, is one successful model for ideation. The Innovation Center then works on the commercialization.

Clay Street is an exercise in which all business units can participate. They contract to use the resource. Multidisciplinary teams participate for up to 12 weeks. Phones and Blackberrys are banned. It’s facilitated by a small group that focuses on disruptive opportunities. Team members are internal and external people. The success rate to date has been higher than average.

One of the business realities of the current decade is relationships of the business to business world. WalMart is P&G’s largest customer. It is necessary to work with organizations where full control has to be surrendered to achieve joint objectives. One advantage on B-to-B side is that suppliers and partners have a much clearer view of what they want.

Another reality in the marketplace is that it is more difficult to grow, and very difficult to do so on a consistent, sustainable basis. With more and smarter competitors, you can’t go it alone.  Self-sufficiency is no longer valid model. P&G understands the shoppers and the consumption, usage experience. Retailers have a different perspective that completes the picture. The shared need to grow profitably drives innovation in products and services. P&G’s approach is to partner to define joint business goals, develop strategies to focus on innovations and value creation. The system is imperfect, but improving. They are doing more innovation with suppliers and customers Lafley named a joint lab with BASF as a recent success. They have even partnered with competitors where appropriate to explore non-competitive areas were they can create value together.

To drive change in a company that is 160 years old requires three things:
1.    Loosen up the structure
2.    Understand the necessity for an agile, disciplined process
3.    Maintain a culture that supports innovation

Lafley sees P&G to as much like Toyota. It is essential to preserve core values of integrity and trust while seeking change through external focus and recognition of the impact of disruptive world.  

Culture of innovation has to be open, connected, collaborative, curious and courageous. It’s a journey. You measure progress constantly. The successes are evident on the bottom line and in employee surveys.

The journey to drive transformation, takes time. Growth is even more challenging. It is important to maintain a long term view, beyond the current quarter or current fiscal year.
Lafley cited Druder’s view of the role of chief executive. The principle role, he said, is to balance short and long term goals. Lafley is focused and planning for 2010 to 2020. The innovation portfolio ranges 5-7 years, sometimes longer. He dismissed the news sources for their short term reporting. “CNN makes me crazy,” he said. “It’s so this minute. Reactive. Not helpful.”

Regarding pressure from financial markets, he said, “You have to ignore it. No business runs on a quarterly cycle. Color cosmetics may be an exception. But, most business runs on multiyear cycles.” The cycle of innovation is longer. You have to fend off analysts to stay focused.

“If you’re really focused on the customer, that creates more customers, more loyalty. It inspires employees. That covers the shareholder and the rest fall into place.” The trouble comes from not serving the customer best.

What is role of leader in innovation? It’s incredibly important. It requires a lot of faith in the employee base. You need the right leaders and leadership teams to enable employees. The CEO is the chief external officer and the chief innovation officer. But,. You still need great operators and executers to deliver branded products in an intended way. You need right and left brainers. You mix it up with rotational assignments and provide training to foster growth.

He claimed that he needed to unlearn almost everything he learned in school, which included an extreme liberal arts education, a math major, history and literature followed by graduate courses in cinema. “I think school opened me up and made me curious.” In the workplace, he learned the power of connection and collaboration while in Asia. He learned to improvise, keep things simple and use discipline. The biggest problem large organizations have is too much capability. They are enamored with complexity. “My job is to keep things Sesame Street simple and maintain discipline. The best methodologies and research techniques reduce risk, but still fail half the time.”

His advice on how others should others begin their transformational journey is to focus on strategy and business model first. What do you aspire to achieve? Do you have to play by current rules? Or is it better to change the rules and then learn how to play the new rules better than anyone else? Determine if you will be the cost leader, live by a differentiation strategy – dependent on innovation, or focus on a niche strategy – ideally alone and safe from competition.

It starts with strategy. Then only then, innovation takes strategic role, then you have to commit to it. After 32 years he claims he’s still just scratching the surface. “You learn far more from failure than from successes. we’re trying to fail faster, cheaper so we can move on to next success.”

For additional perspectives on the P&G design thinking process, see Claudia Kotchka, Front End of Innovation, 2006 summary.

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